How sunny is the outlook on Enphase’s share price?

Enphase’s [ENPH] share price has proven to be one of the more resilient solar stocks. So far this year, the stock has delivered a 35% gain (through 2 November), well ahead of rival SolarEdge’s [SEDG] 11% gain in the same period.

A strong set of earnings results has seen investor interest in the solar energy company. But are investors right to keep their sunny disposition around Enphase’s share price? Or is the stock about to overheat?

Third quarter results power Enphase’s share price

Enphase’s share price has surged over 36% since 27 October after posting record revenue of $351.5m during the third quarter - an 11% jump quarter-on-quarter and 53.2% higher year-on-year.

Adding power was fourth quarter revenue guidance of between $390m and $410m that topped Wall Street expectations, reports CNBC.

Strong demand for Enphase’s microinverter systems carried over into the third quarter, with shipments of the Enphase Storage system up 51% compared to the previous quarter. For those of you wondering, microinverters convert solar energy to AC energy which can be used around for everyday needs.

Despite the strong results CEO Badri Kothandaraman outlined some upcoming headwinds. Chief among these are supply chain constraints adding to costs.

“Every component in the supply chain is stressed,” Kothandaraman told CNBC. “It is all hand to mouth...every cost is going up and that’s happening right now.”

Non-GAAP operating expenses were also up, coming in at $57.3m for the third quarter, up from $51.7 in the previous quarter. Enphase pinned this on additional investment in R&D and marketing spend.

However, Enphase is taking pragmatic steps to address supply chain constraints, including adding production at a plant in Mexico.

“Overall, it was a strong quarter, as higher logistics costs were offset by pricing increases and cost management and microinverter demand continues to outstrip supply,” Citi wrote in a note to clients following the earnings announcement.

Should investors let Enphase’s share price cool down?

The question for investors is whether Enphase’s share price can sustain this trajectory. In a short-period of time the stock has blasted through the $200 level to trade at an all-time high, having spent most of summer and the beginning of Autumn relatively range bound.

Howard Smith writing on The Motley Fool notes that Enphase has been growing its business internationally, with recent expansions into Italy and Brazil. The writer also suggests that soaring natural gas and oil prices have put clean energy stocks back on investors' minds. In a separate piece Smith pointed to new product launches that could help the company deliver returns for shareholders.

“Given the anticipated continued growth in the sector, Enphase's new products and technology, and the expectation that it will have enough supply and capacity to satisfy demand, the outlook is sunny for this company and its shareholders” - Howard Smith, Motley Fool

Then there’s the infrastructure bill which, if passed, could provide additional incentives to use green energy, which would benefit not only Enphase but clean energy stocks more generally.

“Given the anticipated continued growth in the sector, Enphase's new products and technology, and the expectation that it will have enough supply and capacity to satisfy demand, the outlook is sunny for this company and its shareholders,” wrote Smith.

For pragmatic investors, it could be worth seeing if the rally cools off before investing. According to the Refinitiv data, Enphase’s share price has an average analyst price target of $220 - hitting this would see a 7.4% downside on Tuesday’s close. The most bearish target from the 12 analysts covering the stock is $180, which would see a 24% downside, while the most bullish target is $273, a near 15% upside.